Dec. 5 (Bloomberg) -- Chinese stock investors emptied
trading accounts at the fastest pace in 16 months last week,
three days before the benchmark Shanghai Composite Index rallied
the most in three months.

The number of Chinese stock accounts containing funds
dropped by 205,000 to 55.6 million, the largest decline since
the week ended July 8, 2011, according to regulatory data
compiled by Bloomberg. The number of funded accounts slid to the
lowest level since the week through Nov. 26, 2010, after
reaching a high of 57.28 million in June 2011. About 112 million
accounts are empty or frozen, the data show.

Investors may have reached the point of “capitulation,” a
buy signal for contrarians, Oversea-Chinese Banking Corp.’s Vasu
Menon said. The Shanghai Composite will rally 48 percent within
nine months after its decline below 1,960 signaled selling has
peaked, according to Tom DeMark, the creator of indicators that
aim to show turning points in securities. The gauge closed 2.9
percent higher at 2,031.91 today, the most since Sept. 7.

“The best time to buy in certain markets is when there’s a
very high level of skepticism,” Menon, who’s vice president of
wealth management at Oversea-Chinese Banking, said from
Singapore by phone today. “People are very skeptical about the
market because it has underperformed for such a long period of
time and people have become despondent.”

The Shanghai Composite closed below 2,000 for the first
time since 2009 on Nov. 27 amid concern a seven-quarter economic
slowdown may drag on earnings and a possible wave of new share
sales would draw funds from existing equities. The index fell to
1,959.77 on Dec. 3, when the gauge traded at 10.8 times reported
earnings, the cheapest on record.

World’s Worst

Even after today’s gains, the index is down 7.6 percent for
the year, heading for a third straight year of losses and the
biggest decline among the world’s 10 largest stock markets.
The advance is also the sixth time this year the Shanghai
Composite has climbed more than 2.5 percent on a daily basis.
The MSCI All-Country World Index has climbed 11 percent in 2012.

The number of stock-trading accounts that made transactions
in yuan-denominated A shares last week increased to 6.1 million
from 5.6 million the week before, which was the lowest since at
least January 2008, excluding weeks that had holidays. The value
of shares traded on the Shanghai exchange rose to 43.5 billion
yuan ($6.99 billion) yesterday after falling to 33.1 billion
yuan on Nov. 26, the least in four years.

Last Seller

The benchmark index for Chinese equities will advance to
2,900 after its decline produced a buy signal on the Sequential
and Combo charts, designed to identify market tops and bottoms,
said DeMark, who has spent more than 40 years developing market-timing indicators.

“Everyone is negative on SHCOMP index, absolutely
everyone,” DeMark wrote in an e-mail, referring to the Chinese
benchmark gauge’s ticker symbol. “And now is the perfect
environment to make a low and be positive as the last seller,
figuratively speaking, has sold.”

Chinese companies listed on the mainland traded at the
biggest discount to their Hong Kong-listed counterparts last
week since January 2011, according to an index from Hang Seng
Bank Ltd., signaling global investors were more positive than
locals toward the nation’s shares.

The Hang Seng China Enterprises Index of Chinese companies
listed in Hong Kong climbed 18 percent since Sept. 5 through
last week. Yuan-denominated shares are restricted to domestic
investors and a limited number of foreign institutions, while
their Hong Kong counterparts are open to overseas investors.
The Hang Seng China index rose 2.6 percent today.

Investor Confidence

A Bloomberg investor poll showed confidence in China’s
economy is at the highest in more than a year amid optimism the
new leadership headed by Xi Jinping will be better for the
financial climate. Respondents who see the Chinese economy
improving or remaining stable surged to 72 percent last week,
from 38 percent in September, in the quarterly global poll of
investors, analysts and traders who are Bloomberg subscribers.

Today’s stock rally came after the ruling party held its
first meeting headed by new leader Xi Jinping and the government
allowed insurers to invest more in banks. Trading volumes were
135 percent higher than the 30-day average at the close.

“China’s domestic A-share market is one of the worst-performing equity markets in the world,” Tao Wang, chief China
economist at UBS AG in Hong Kong, wrote in a note dated
yesterday. “In the coming quarters, we do expect corporate
earnings to recover, along with the economy, as destocking ends
and output prices recover,” while the government will continue
to push for reforms of initial public offerings, he wrote.

The economy expanded at the slowest pace since 2009 last
quarter. More than 800 companies have applied to sell shares on
the local exchange, according to a Credit Suisse Group AG report
dated Nov. 29.